Is South America flying under Washington’s radar?

Trump has “only” imposed the reciprocal minimum tariff of 10 percent on almost all South American countries. What is the reason for this and what consequences could it have for the region?

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

South America breathes a sigh of relief. On his “Liberation Day”, Donald Trump has only imposed the lowest import tariffs on South American countries as part of his tariff increase offensive. With the exception of Venezuela, imports from all countries will “only” be increased by ten percent.

This does not include the tariff increases already implemented for steel and aluminum. The import duties of 25% announced a few weeks ago also apply to Mexico with immediate effect.

We can only speculate as to why South America is getting off relatively lightly compared to the emerging economies of South East Asia. A look at the trade balances helps: the USA achieves trade surpluses with all of South America’s major economies. There is therefore no rational reason to impose import tariffs on South American exports if you want to reduce foreign trade deficits – as Trump clearly does – and view them negatively.

The situation is different with Mexico. The country, which is linked to the USA and Canada initially through NAFTA and from 2020 through the successor agreement USMCA (United States-Mexico-Canada Agreement), has the largest trade surplus with the USA after China.

However, this does not mean that South America will be spared Trump’s retaliatory policy in the future due to its trade deficits with the US – it is still too early for that and Trump is too unpredictable.

Nevertheless, the US president’s unexpectedly relaxed attitude towards South America could indicate that Trump considers the southern part of the American continent to be part of the USA in the sense of the Monroe Doctrine.

Around 200 years ago, the USA declared that it controlled Latin America and would not tolerate any foreign powers there.

After the end of the Cold War, the Monroe Doctrine was forgotten. However, even during the first Trump administration, close associates such as security advisor John Bolton and CIA Director and later Secretary of State Mike Pompeo declared that the Monroe Doctrine applied again.

However, punishing South America with high tariffs would drive the region into the arms of other trading partners – and China in particular. The growing Chinese investments in mining, power grids, telecommunications and infrastructure are being watched critically in Washington.

Mauricio Claver-Carone, Special Representative of the US State Department for Latin America, proposed imposing a 60 percent tariff on products entering the US via the Chinese-financed port of Chancay in Peru.

However, it remains to be seen what impact the increased US tariffs will have on the global economy and thus indirectly on foreign trade in South America.

South American and Mexican agricultural producers, for example, are hoping that East Asian countries and China will increase their food imports from South America, as they could also impose tariffs on agricultural exports from the USA.

During the first Trump administration, Latin American farmers were able to significantly increase their exports to Asia.

Another positive factor could be that Latin American companies are now expanding their value chains from Mexico to Argentina. Until now, the Mexican economy in South America has been seen as a region that focuses primarily on North America and neglects its southern neighbors. This could now change.

On the other hand, Latin American industrial and consumer goods companies fear that Asian competitors could now try to divert their exports blocked in the USA to other regions – the growing Latin America would be an ideal domestic market with a population similar to that of Southeast Asia.

Will Trump take a hard line with Mexico, the most important trade partner?

Even if he will still change his customs policy, the damage has already been done: Investors are unsettled and will reduce their investments in the country. This will affect German companies in particular.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Donald Trump is following through with his isolationist policy, as he has announced: He has now announced import tariffs for Mexico (and Canada) at 25 percent. The increase for Mexico will only apply from April 2. This is likely to drive the Mexican economy into recession this year. The tariffs will also accelerate inflation and slow down growth in the USA.

This is because Mexico is the USA’s most important trading partner. The USA and Mexico, together with Canada, have been linked by free trade agreements for more than 30 years.

Initially, it was the 1994 NAFTA agreement, the North American Free Trade Agreement, that drove trade and the expansion of value chains in North America. The successor agreement USMCA (United States-Mexico-Canada Agreement) has been in force since 2020 and is due to be revised in the coming year.

Thanks to these institutional trade agreements, Mexico has been the USA’s most important trading partner since 2023 – ahead of China. Last year, Mexico exported goods worth 506 billion US dollars to the USA. By comparison, German companies’ exports to the USA amounted to 161 billion euros last year.

In turn, US companies exported goods worth 335 billion dollars to Mexico. The trade deficit (171 billion dollars) is therefore almost three times as high as that with Canada.

However, the trade balances say little about the intensive interdependence of the companies: Hundreds of US companies have been producing in Mexico for decades – from consumer goods manufacturers in the food sector to high-tech companies in the aerospace industry.

The division of labor is most advanced in the automotive industry. This means that a car is transported back and forth between the plants in Mexico and the USA several times during its production before it rolls off the production line.

German industry is particularly affected by this division of labor. According to the German Bundesbank, German companies have invested between 15 and 20 billion US dollars in Mexico since the turn of the millennium. This makes Mexico the most important recipient of German direct investment in Latin America after Brazil.

There are more than 2,000 companies there with German capital participation. The Mexican branches of German companies also export the majority of their production to the north. The products are correspondingly highly developed compared to the South American locations, where the local market is usually the target.

With the US tariff policy, the average price of a passenger car manufactured in Mexico will now increase by around 6,000 dollars in the US. An SUV, i.e. a city jeep, could now cost 8,000 dollars more. The government has now announced that it wants to exempt US companies from the tariffs. However, it remains to be seen how and whether this will be implemented.

It is obvious that the measures will also cause great damage to the US economy. The US stock market reacted negatively, inflation expectations rose and growth prospects became gloomier.

Following the announcement of the tariff increases, US Secretary of Commerce Howard Lutnick tried to reassure the public that he was in constant contact with the “partner countries”.

Mexico_Border — © Unsplash/Barbara Zandoval

Growth prospects in Latin America remain stable

Because of Trump, the region will seek to expand relations with other partners. China in particular will benefit from this, but Europe also has a historic opportunity to strengthen cooperation.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Economic forecasts for Latin America have rarely been as difficult as this year. Mexico got a foretaste of this when the US president announced a import tax on imports from its southern neighbor.

The Mexican economy would immediately slide into a recession that could last until at least the end of 2026, according to the rating agency S&P. 80 percent of Mexican exports go to the USA. Around 4.5 percent of the economy depends on remittances from the estimated 37 million Mexicans in the USA.

However, the Trump uncertainty factor in Latin America must be put into regional perspective. While the Caribbean, Central America and Mexico are heavily dependent on the new government’s decrees and the outlook is correspondingly uncertain, this is far less true for South America.

The region’s commodity exporters such as Argentina, Brazil, Chile and Peru are hardly dependent on the North American sales market. On the contrary: under the first Trump administration (2017-2021), South American commodity economies benefited from rising exports to China. There, they replaced US exports that were lost due to Chinese sanctions against North American imports.

Most observers currently rule out a similar substitution effect, as China is also unlikely to increase imports of ores, metals and agricultural goods due to its economic stagnation.

The outlook for the Latin American economies is therefore quite stable – apart from the Trump effect: JP Morgan estimates that the region will grow by 2.2 percent this year, slightly more than in the previous year.

The slight increase is mainly due to Argentina, which could grow significantly again for the first time this year under President Javier Milei (5.5 percent). The investment bank also expects stronger growth than last year for Colombia (2.5 percent) and Ecuador (1. percent). However, in view of the difficult political framework conditions in these countries, these forecasts should be treated with caution.

In the other major economies, growth will be weaker compared to 2024. However, none of Latin America’s six major economies will stagnate or even slip into recession.

However, the new administration in Washington and the associated uncertainty will prompt governments in the region to look for new trading partners.

Trump’s unpredictable course towards Latin America is a particularly good opportunity for China. In 2024, China strategically expanded its cooperation in South America: Beijing granted Argentina a loan, opened one of the continent’s largest ports in Peru and adopted a major investment and cooperation package with Brazil.

This will allow China to seamlessly intensify its involvement in South America. The countries will welcome Chinese investment in infrastructure when other investors such as the USA withdraw or Europe is preoccupied with its own crises.

In the second half of the year, the BRICS summit in Brazil will provide a political forum that China will use to demonstrate its new ties with South America. It is quite possible that the USA will respond to such a demonstration of power in its sphere of influence with sanctions. These would primarily affect Brazil.

For Europe, the possible confrontational course of the USA towards Latin America offers a historic opportunity to establish itself as a reliable partner. The prospects for a revival of the EU-Mercosur agreement have improved – despite all the political uncertainties that could continue to hinder the realization of the bi-regional economic community in both Europe and South America.

Europe should seize this opportunity and invest massively in relations with Latin America – both literally and figuratively.

Water lilies Inhotim — © Unsplash/Fernando Dantas

Argentina is South America’s success story of the year

President Milei has stabilized the country in a serious crisis. Now he must continue his reform course. A further recovery of the continent’s second largest economy would be important for South America.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Exactly one year ago, political newcomer Javier Milei took office as President of Argentina.

It is no exaggeration to say that Milei has succeeded in bringing Argentina and its politics back to international attention. The libertarian’s policies polarize many people around the world. In the meantime, “Milei” has even become part of the election campaign in Germany.

Milei’s results after one year are impressive:

Inflation lowered

Inflation has been reduced significantly. Instead of over 20 percent per month, it is now just under three percent. If everything goes according to plan, annual inflation could have fallen to 25 percent by the end of next year. That is not much by Argentinian standards.

State budget in the black

In addition, the government is no longer generating deficits in the national budget, but surpluses. This means that the root of decades of inflation has been cut. Milei has achieved this by cutting government spending by up to 30 percent, depending on the estimate: layoffs of state employees, pension cuts and the elimination of transfer payments to the provinces were the decisive measures to bring the budget into the black.

Deregulation driven forward

To this end, laws that burden the economy and the everyday lives of Argentinians are being abolished or amended. Many authorities and ministries that it considers superfluous have been closed. In this way, the government wants to increase the weak productivity of the economy and public administration. It is proceeding according to a detailed plan.

The reform program has not damaged Milei’s popularity. The government has the same approval and rejection ratings as in the elections a year ago. That is better than the previous governments. With stability, confidence has grown that things will get better in 2025. The poverty rate, which has risen by eleven percentage points this year, is starting to fall again.

The start was therefore remarkable. Many had expected that the often aggressive economist would only last a few months in the Casa Rosada.

The Milei government must now continue its reform program. In the short term, it has some pressing problems to solve:

High prices

On the one hand, Argentina has become the most expensive location in South America over the past twelve months. This is jeopardizing the industry, which is barely competitive with foreign rivals – both domestically and on export markets or in Mercosur. Local service providers (tourism, data centers) are also suffering from the high prices.

Increasing purchasing power through new jobs

In addition, new jobs must be created quickly in order to increase the purchasing power of the population and approval of the government.

Abolish capital controls

However, it will be crucial for investors that the government gradually relaxes capital controls in the coming year and eventually lifts them completely. This is because investors are reluctant to bring their capital into the country if they could suffer losses in value in the event of a devaluation. Foreign investors also want to be able to repatriate capital gains and dividends.

A stable Argentina is important for South America. The many crises of recent years have made us forget that the country is the second largest economy on the continent. A leaderless, chaotic Argentina, as has been the case in recent years, is a burden on South America as a location and trading partner.

If the country attracts investment and attention again, this will also strengthen the importance of Mercosur. Resistance in the EU to the agreement with the confederation is likely to decrease if Argentina can once again act as a fully-fledged trading partner.

So we can only hope that Milei will continue to be successful with his reform course.

Caminito, Buenos Aires, Argentinien — © Pixabay/Brigitte Werner

A lift for Brazil’s infrastructure

Investors are showing a surprisingly high level of interest in new concessions. The government now wants to increase the proportion of private participation in them.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

After a long standstill, there is suddenly movement in Brazil’s infrastructure sector. For the first time in years, there have been lively bidding rounds in recent tenders. Among other things, they involved the connection of two important trunk roads from the agricultural regions to São Paulo and to the Atlantic ports. 14 companies and investment funds bid and drove up the premiums significantly. The companies pledged to invest around 3.6 billion euros in the expansion of the highways.

This is just the beginning. Above all, the government wants to increase private investment in roads, rail concessions and sewage systems. The government plans to auction off 35 tenders for trunk roads during its term of office until the end of 2026. There will also be five railway lines.

The great interest is surprising. After all, Brazil’s infrastructure sector developed far below its potential for almost a decade due to the Lava Jato corruption scandal. The construction companies involved at the time dropped out as investors. The pandemic and political turmoil led to a further phase of reticence on the part of private companies.

But now the framework conditions have changed: With the new tender law of 2021 (Nova Lei de Licitações e Contratos, or NLLC for short), concessions have been modernized. They are more transparent, more sustainable and the state assumes significantly higher risks than before.

In addition, the government of President Luiz Inacio Lula da Silva has hardly any funds available to finance state infrastructure projects. Financial investors now expect cuts in government spending – not further increases.

Brazil’s budget deficit has risen by around ten percentage points from 72% of gross domestic product (GDP) since Lula took office at the beginning of last year. Investors are already demanding high interest premiums to lend money to Brazil. The key interest rate is at an astronomical 10.75 percent – not good conditions for long-term investments.

At the same time, Brazil is investing less than half of what would be necessary just to maintain the existing infrastructure. Instead of 4-5 percent of GDP, less than 2 percent flows into the sector, according to experts from the consulting firm InterB.

In order to close the investment gap, the government is now relying primarily on private capital. The state development bank BNDES wants to increase the proportion of private concessionaires in tenders to 75% through financing. This year, the proportion of private investment in infrastructure has exceeded that of the public sector for the first time.

It can be assumed that new foreign companies will soon enter the scene: The more projects in the pipeline, the easier it will be to spread the costs of expensive participation in tenders. In addition, Brazilian investment funds in particular are emerging as new players.

There are many indications that Brazil is facing a new wave of infrastructure investment. This would be a good sign for the economy as a whole: After all, transportation costs are currently the biggest cost factor for the export economy.

Brazilian trunk road — © Pixabay/Lara Vidotto

Brazil’s new neutrality as an opportunity for Europe

The country is currently readjusting its position in global politics. Its geopolitical neutrality could become a strategic advantage for the German economy’s most important investment location in South America.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

Brazil’s diplomacy is being put to the test in the coming days. Within a month, several important meetings will take place at which the country will have to make clear what position it is seeking in world politics and thus also in the global economy.

The events are high-profile: The BRICS+ summit in Russia will kick things off – the first meeting following the expansion of the association of states. The APEC Forum (Asia-Pacific Economic Cooperation) from November 10 to 16 in Peru is important for Brazil’s future connection to South America and the Asian market. Brazil will host the G20 summit in Rio de Janeiro (November 18-19). Immediately afterwards, Chinese head of state Xi Jinping will visit Brazil to mark the 50th anniversary of Sino-Brazilian relations.

It can be assumed that Brazil will attempt to demonstrate a geopolitically neutral position on these occasions, comparable to the role of a non-aligned state. In view of the increasing intensification of global political confrontations, this is a difficult undertaking – and will disappoint many who expect Brazil to adopt a clear global political stance.

For example, the Brazilian government has lost sympathy in the USA and Europe by taking sides with Russia, Venezuela and Palestine. The “peace plan” for Ukraine presented jointly by Brazil and China, which primarily takes Russian interests into account, has further increased doubts in the democratic West.

At the same time, however, Brazil has so far resisted China’s attempts to embrace it. Beijing is urging Brazil to sign a Silk Road agreement in order to give Chinese investors better access. However, Brasília wants technology access and reliable investment commitments, which China has neither offered nor is willing to guarantee.

Brazil is also negotiating with China from a position of strength: China is Brazil’s largest trading partner. However, China is dependent on food and oil imports from Brazil precisely because of the confrontation with the USA.

The extent to which Brazil will succeed in remaining “neutral” in global politics in the future will not only be decided in Brasília, but also by political developments in Washington and Beijing over the next few years.

In Europe, however, we should also see Brazil’s striving for equidistance from the new and old power blocs as an opportunity. For three reasons:

1) Brazil’s neutrality could prove to be a positive location factor in the event of an intensification of the power struggle between new and old superpowers. Brazil will try to continue to trade with the whole world and stay in touch. European companies should take this into account when reorganizing their value chains under the heading of “nearshoring”.

2) Brazil will become more important as an exporter in the global economy: the country will gain in importance as a producer and global supplier of food, industrial raw materials and conventional and sustainable energy.

3) And last but not least: Brazil, like the economically most important countries in South America, is a democracy. There are no signs that they want to change this.

Against this backdrop, the conclusion of the EU-Mercosur agreement would be all the more important, as it would be a win-win situation for both sides. Both regions would significantly increase their geopolitical weight by establishing the world’s largest economic community. This should be in the interests of both South America and Europe.

Brazil’s credit rating rises: Moody’s upgrade comes as a surprise

Despite rising public debt, Latin America’s largest economy is approaching investment grade – a good sign for the entire region.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The news on October 1 took the financial market in São Paulo by surprise: for the first time in eight years, the rating agency Moody’s upgraded Brazil’s country risk. At Ba1, Brazil is now just one upgrade away from regaining the investment grade it lost in 2015.

An investment grade is important for an emerging country like Brazil because it enables institutional investors such as pension funds to invest in the country’s bonds or funds. This makes borrowing easier and cheaper.

Companies and banks seeking international financing also benefit from a better country rating. Following the upgrade by Moody’s, the agency also improved the ratings of numerous Brazilian companies and banks.

The improvement in Brazil’s credit rating came as a surprise, as almost all investment banks and economists are of the opinion that Brazil’s budget deficit is too large and that debt will therefore increase too quickly. Hardly anyone expects the government to achieve a balanced or even positive budget without taking interest payments into account.

However, such a primary surplus would be necessary to give the financial markets a signal that debt will fall again. Otherwise, further interest rate hikes will be necessary to convince investors to lend money to Brazil. The key interest rate is already at a high 10.75 percent.

In fact, Brazil’s national debt has risen by almost ten percentage points since the start of the current government. Fitch Rating, for example, fears that debt could rise to 84% of GDP in the coming year (from 72% at the beginning of 2023).

However, Moody’s is not impressed by such fears. For the agency, the better-than-expected growth, now in its third year, is the main reason why Brazil is able to repay its debts thanks to higher tax revenues. The reforms of recent years (such as the autonomy of the central bank, the pension reform or stricter corporate governance rules for state-owned companies) have also increased Brazil’s productivity.

This is a surprisingly good testimony to the government’s economic and financial policy. Especially as Moody’s has not only improved the rating, but also given it a positive outlook.

Moody’s is now more optimistic than the other two major rating agencies. Standard & Poor’s and Fitch rate the country BB, two notches below investment grade, and both have a stable outlook.

Of the six largest economies in Latin America, Brazil and Argentina are currently the only countries without an investment grade rating. Chile, Mexico, Peru and Colombia have the agencies’ seal of approval.

However, rating experts believe that the outlook for all of these economies has deteriorated this year. Downgrades could follow in the medium term. The weak growth prospects in Latin America in particular have made the agencies more skeptical.

The upgrade of Brazil’s country risk is therefore a positive signal in the midst of growing skepticism.

Robust growth despite skepticism on the financial markets

The Brazilian economy is once again performing significantly better than expected. Nevertheless, financial investors remain cautious in the face of rising government spending.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

The Brazilian economy surprises with its dynamism for the third time in a row

Growth forecasts for 2024 have been raised significantly following a strong second quarter. Latin America’s largest economy will grow by around three percent this year. This is in line with the trend of recent years: gross domestic product has been rising by around three percent annually since 2021.

This is primarily due to domestic consumption, but for the first time, investments are also on the rise again: Government and private demand increased by almost five percent by the middle of the year – and thus more strongly than the economy as a whole. Rising imports, which were almost 15% higher in the second quarter than in the previous year, closed the gap between supply and demand on the domestic market.

Unemployment stands at just under seven percent. This is almost full employment by Brazilian standards. It is the lowest unemployment rate in ten years. Capacity utilization in industry is also higher than it has been for a decade.

In the meantime, inflationary pressure has increased due to higher growth and the largely empty labor market. The weak real is also contributing to rising inflation. The inflation rate for the last twelve months is 4.5 percent. As the economy is thus moving away from the central bank’s inflation target (3 percent), the monetary authorities are likely to raise interest rates this year or leave them at the current high level. The Selic prime rate currently stands at 10.5 percent.

Brazil’s foreign trade balance is also solid: a clear export surplus was achieved until August, although imports grew more strongly than exports for the first time again. The foreign exchange balance is well filled at USD 370 billion.

According to a report by the Organization for Economic Cooperation and Development (OECD), Brazil is the second most important destination for foreign direct investment worldwide. Last year, 64 billion US dollars flowed into the country. Only in the USA did foreign companies invest significantly more. The Brazilian central bank expects a similarly high inflow of foreign investment this year. This means that Brazil’s economy is stable by global standards.

Financial investors are currently skeptical about Brazil

This year, more capital has been withdrawn from the stock and bond markets than at any time in the last 40 years. This year, the Brazilian share index has not only brought up the rear in Latin America alongside Mexico – in a global comparison, hardly any other stock market has performed as badly as the one in São Paulo. The dollar has appreciated by around 15 percent against the real this year. Investors are demanding higher interest rates (spreads) for Brazilian bonds because the risk is increasing from the perspective of the financial markets.

There is one main reason for the discrepancy between the positive economic reality and investor restraint: investors and many entrepreneurs are concerned about the government’s lack of budgetary discipline, which automatically leads to high interest rates. In addition, the planning horizon for entrepreneurial decisions is shortening, as it is unclear whether the government will react to possible declining growth figures with an expansive spending program towards the end of the legislative period.

Government spending has already increased significantly. The government’s primary deficit (i.e. excluding interest payments) is currently around 2.5% of gross domestic product (GDP). The primary budget is the decisive indicator of whether a state will increase or reduce its debt in the medium term.

Under the Lula government, the debt ratio rose from around 70 percent to the current 76 percent of GDP. The independent Fiscal Institute (IFI) estimates that Brazil’s debt will rise to over 100 percent by 2034. This is not worrying for an industrialized country, but too much for an emerging country like Brazil. This is because the state has to repay more and more debt without being able to invest in infrastructure, healthcare or education.

But there are other reasons why financial investors and entrepreneurs are skeptical about the economy’s development potential. They are bothered by the government‘s state-dominated economic policy. They fear that Brazil will remain stuck in unambitious mediocrity and fall further behind along the way. In fact, the economy’s productivity is hardly increasing at all. The average labor productivity of Brazilians is stagnating at the level of the 1980s.

It is unclear where the necessary productivity growth in Brazil will come from – apart from modern agriculture and mining. This is because Brazil’s population growth is declining. Brazil will no longer benefit from the demographic bonus – if the economically active population grows faster than the number of inactive people (pensioners and children).

At 16% of gross domestic product, the investment ratio is also very low. Brazilian companies do not play a significant role internationally in the growth areas that are currently important worldwide, such as artificial intelligence, data science, semiconductor technology or IT.

Contrary to expectations, Brazil has so far benefited little from the nearshoring taking place worldwide. Until recently, the economy was confident that Brazil would benefit from the global shift of economic value chains away from China and towards Western countries. However, unlike in Mexico, for example, hardly any new industries have set up in Brazil to benefit from access to the US market.

Only Chinese car manufacturers and suppliers have launched an investment offensive. Several companies are currently building factories and are focusing on the local market and Brazil as a location for exports to South America. This applies in particular to electric cars. European car manufacturers in particular will come under pressure in one of their traditionally important markets as a result.

Nevertheless, Brazil has important strategic advantages in international comparison

Brazil will continue to expand its position as a global supplier of food in the future. Brazil is one of the world’s leading suppliers of soy, meat, sugar, corn and coffee. Suppliers for the agricultural and food industry have a large market there.

Brazil also has great potential when it comes to industrial raw materials: in addition to iron ore, the country supplies many important mining products, from niobium to lithium. And as an oil producer, Brazil’s importance in the world will increase. Today, Brazil is the eighth largest oil-producing country in the world. Further deposits off the coast are to be developed.

At the same time, Brazil already obtains a significant proportion of its electricity from sustainable sources. This makes the country an attractive location for industries that want to produce with green energy.

Another locational advantage is the geopolitically neutral positioning of the country by the Lula government: the country maintains equidistance from the geopolitical power poles of China and the USA. It trades and negotiates with both world powers.

The distance to Europe has also grown

The country’s new neutrality is criticized above all in Europe. But Europe has also lost importance for Brazil. Trade is shrinking. European companies are reluctant to invest in Brazil. In public perception in Brazil, Europe is moving further and further away from Latin America and is also fully occupied with a multitude of its own unresolved problems.

The recently resumed EU-Mercosur negotiations on a common economic zone could therefore bring a new dynamic to relations between Europe and South America. They could do with such a boost.

Will 2024 go down in South America’s history as the year of China?

At present, China could significantly expand its political influence in South America. There are a number of important events coming up in the second half of the year.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

In South America, people have become accustomed to companies from China dominating entire sectors and regions. For example, Chinese state-owned companies control the electricity supply in the state of São Paulo, by far the largest economic center in South America, as well as in the Peruvian capital Lima.

The Chilean capital Santiago has the largest urban e-bus fleet outside of China. Hardly a single road in the Andes is being built today without Chinese involvement or financing. Chinese companies have long been gaining ground in the region’s mining industry.

Trade between China and Latin America has also increased rapidly. In 2023, goods worth almost USD 500 billion were exchanged between China and Latin America, compared to just USD 18 billion around two decades ago (2002).

China’s demand for products such as soy, copper, iron ore, oil and lithium will continue to rise. Almost 90 percent of trade is conducted via Brazil, Mexico, Chile, Peru and Colombia.

The USA is still the leader in investment and trade with Latin America. However, this is mainly due to Mexico, which is closely linked to the USA and Canada via a free trade agreement (USMCA). Europe has also invested more in Latin America than China.

In South America, on the other hand, China clearly dominates as a trading partner. There are a number of events coming up in the next few months that could also significantly strengthen China’s political dominance in the region.

In November, Chinese President Xi Jinping will inaugurate the new overseas port of Chancay in Peru. It will be by far the largest deep-sea port on the Pacific side of South America. It was built and financed under the leadership of the Chinese port operator Cosco. The container port will shorten the journey time between South America and China by ten days.

The port is the flagship project of China’s Belt and Road Initiative (BRI) in Latin America. Beijing is thus rebuilding the global infrastructure for trade in line with its interests. In Latin America, 22 out of 33 countries have signed a BRI agreement with China.

Beijing is now urging Brazil in particular to also sign such an agreement. At the G20 summit in Brasília in November, President Xi wants to present such an agreement as the latest foreign trade triumph to mark the 50th anniversary of Sino-Brazilian relations.

The Lula government is still hesitant. What could an agreement do to improve the good relations between the two countries, they ask themselves in Brasília – and shy away from a demonstrative rapprochement with China in light of the geopolitical tensions between the USA and China. The agreement would be interpreted in the same way in the USA and Europe. However, important representatives of Lula’s Workers’ Party have been pushing for Brazil to join the BRT initiative for some time.

In Uruguay, negotiations on a free trade zone with China are stagnating after both governments signed a memorandum of understanding. Such an agreement would mean the end of Mercosur in its current form. This is because Uruguay is a member and would then have to leave. In Montevideo, it depends on the elections in November whether the China-friendly policy of the current government will be continued.

The BRICS alliance, which is increasingly dominated by China, could also announce the admission of new members from South America at its meeting in Russia at the end of October. Venezuela and Bolivia in particular are keen to join.

There is every indication that China will be able to make significant political progress in South America this year. Europe in particular will feel this as a political and economic headwind.

Chinese paper lantern — © BDI, Fotolia, 6464128 L

Maduro’s election campaign maneuvers jeopardize economic recovery

Venezuela’s economy could boom in the near future. But this requires the rule of law.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

It was not only the majority of the population that optimistically hoped for a peaceful change of government before the elections. Many companies and investors also wanted to see the regime replaced. However, President Nicolás Maduro has made it clear that he wants to remain in power despite the controversial elections.

This is not only a bitter disappointment politically, but also economically: under stable rule of law conditions, the Caribbean country could quickly become one of the fastest growing economies in the world. Alejandro Arreaza from Barcleys estimates that Venezuela would see double-digit growth over the next two years under a new government.

The Caribbean state not only has the largest oil reserves in the world. After ten years of state mismanagement, it has an enormous backlog of investment needs. Multilateral donors and the lifting of US sanctions could boost oil production and the idle domestic industry in a short space of time.

The USA had tightened economic sanctions against Venezuela due to electoral fraud from 2019. These were eased last year because the regime promised free elections. It is now unclear whether the USA will reinstate the sanctions.

Since last year, foreign oil companies such as Chevron, Eni and Repsol have once again been allowed to produce oil in Venezuela to a limited extent. The licenses have just been extended by the USA. They would therefore not be affected by a renewed tightening of the punitive measures.

Venezuela has been experiencing economic stabilization for around three years. According to the International Monetary Fund (IMF), Venezuela will grow by around four percent this year. Consumer inflation has fallen to 160 percent. The dollar has been an unofficial means of payment for three years.

Venezuela’s fall from one of the richest economies in Latin America in 25 years of left-wing government, first under Hugo Chávez and now under Maduro, has been enormous: economic output has shrunk by three quarters in eleven years. The annual per capita income is around 8,500 dollars – about the same as in Bangladesh.

In order to get the economy moving again, the government would have to organize a rescheduling of foreign debt. Venezuela has not serviced its debt of around 150 billion dollars since 2017.

However, Venezuela’s path back to the international financial markets is blocked: Creditors are not allowed to negotiate with Venezuela due to US sanctions. However, Western financiers and companies would only be able to officially invest in the country again after a debt restructuring.

Business lawyers in Caracas are also currently advising Western companies against investing in Venezuela. The legal framework conditions are not secure.

The economy has high hopes that the slight recovery in the oil industry will continue and further support growth: Barclays, for example, estimates that Venezuela’s ailing oil sector offers many opportunities for a short-term and cost-effective turnaround. Before the election, the investment bank forecast an increase in oil production from the current 850,000 barrels per day to two million barrels per day by 2030.

It will now depend on the next US administration what policy it pursues towards Venezuela – and therefore how much the oil state will grow.

Caracas_Simon_Bolivar — © Pixabay/WJGomes

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